MARC ‘ firm’ on govt debt issuance forecast

> Rating agency maintains view that it will be in the range of RM100 billion to RM150 billion this year

KUALA LUMPUR: Malaysian Rating Corp Bhd (MARC) has maintained its 2018 gross Malaysian Government Securities/ Government Investment Issues (MGS/ GII) issuances forecast to be in the range of RM100 billion to RM105 billion despite external headwinds.

“Going into 2H2018, we estimate the average issue size for each offering to be between RM2.5 billion and RM3.3 billion. Given our projection of RM62.8 billion worth of MGS/GII notes maturing in 2018, net issuance is expected to range between RM37.2 billion and RM42.2 billion,” MARC said in its fixed income update yesterday.

MARC does not rule out the possibility of a continuing foreign outflow from local govvies in 2H2018. It expects the pressure from foreign selling of local govvies to persist in the near term, to be driven mainly by external factors. This would, however, be a shortterm phenomenon.

“We also expect the size of the outflows to be reduced due to resilient global crude oil prices; greater clarity from the current government on its medium-term fiscal plan; and expectation of improved medium-term economic fundamentals for Malaysia.”

In the primary market for corporate bonds, it maintained its 2018 forecast of corporate bond issuances of between RM90 billion and RM100 billion. This is despite a more aggressive than previously expected issuance of rated corporate bonds in 1H2018.

Issuance from the governmentguaranteed segment has been declining in recent times and it expects the trend to continue in 2H2018 due to the review of some mega projects by the new government.

“Notwithstanding this, we do not expect a significant impact on the overall health of corporate bond issuance activities as there are still several large corporate bond issuances in the pipeline for the rest of 2018.”

MARC expects the upward yield momentum from 1H2018 for both MGS and corporate bonds to extend into 2H2018. Faltering demand of emerging market financial assets would likely persist in 2H2018 amid concerns over rising interest rates, trade war jitters, possibility of currency devaluations worldwide, and political developments in some European countries.

“However, we do not expect sharp increases in yields due to some mitigating factors, which are Malaysia’s commendable economic growth; and new positive effort to address high government debt by the new administration,” the rating agency said.

In 1H2018, MARC’s rating activities were stable as all corporate bond issuers within its rating universe experienced no rating changes. For 2H2018, MARC foresees more challenges ahead for corporate and financial institutions in its rated universe.

MARC’s opinion reflects the ongoing uncertainty following the proposal to abolish tolls, cancellation of some mega infrastructure projects and the escalating trade tensions between the US and China that may erode future earnings of corporate bond issuers within MARC’s rated universe.